DOE Archives - Fight Student Debt

A frequently asked question from many borrowers is whether they can settle their student loan debt by means of a reduced, lump sum payment? Usually, the borrower is behind on payments, and a parent is willing to step up to the plate. That question leads to my first question, are we talking about a federal loan or a private/state loan?

Let’s assume that the loans are federal loans? The answer is that you can settle on a federal loan. The issue is whether it makes sense.

First of all, you can only settle on a federal loan if it is in default. That means generally that you are behind 270 days on payments. In other words, you missed 9 payments. Note that a default triggers a slew of collections efforts that do not require a court judgment.

The two main types of federal student loans are Direct Loans and FFEL (Federal Family Education Loans) What deals are the feds willing to make on a Direct loan? Well, there are general rules which indicate that the government will offer a compromise on a case by case basis based on all the facts and circumstances. However, the following options were spelled out in the DOE’s 2009 PCA manual (http://www.studentloanborrowerassistance.org/wp-content/uploads/2013/05/2009-pca-procedures.pdf):

100% of principal and interest with no collection fees;

100% of principal and 50% of interest with no collection fees; or

90% if principal and interest with no collection fees.

Note that you cannot demand by right the above options. The DOE has to agree to such options based on the facts and circumstances of your case.

The other principal type of federal loan is the FFEL which are issued by a private lender but guaranteed first by a guarantee agency and then ultimately by DOE. Guaranty agencies may compromise or settle for no less than 70% of principal and interest with no collection fees. The guaranty agency can theoretically give you a better deal, but it does not bind the DOE. So, if you make a deal for 50% of principal and interest with the guaranty agency, the DOE can come after you for the difference. It is important to get any compromise in writing and the writing should state that the DOE is bound by the terms of the settlement, and the DOE should sign off on the agreement.

The amount of the discount for a lump sum payment is rather underwhelming. Why won’t the DOE and guaranty agencies make a better deal? The reasons are many but two main reasons are that federal loans give the borrower the option to pay according to his or her income. And, the collection powers of the federal government are so strong that they know they are going to get their money- one way or the other.

So, the answer to the question of whether you can settle on a federal loan is yes, but the real question is why would you want to?

It is spring break time. So, you can expect to see stories about young people going to Florida, the Caribbean or Mexico to party. Nothing new. However, this year, there have been a slew of stories about students supposedly using their student loan money to fund the party. A recent Forbes article by Kate Ashford stated that a recent poll of students indicated that 30.6% of students stated that they are using student loan money to help pay for spring break this year.

Why would students do that? An Investor Business Daily editorial indicated that just under one-half of millennials believe that their student loans will be forgiven. After all, Bernie Sanders advocated for forgiving student loans.

So, if the loan is forgiven, who is left with the bill? The taxpayer. Sometimes that approach may have some validity on a societal basis if the beneficiary is truly needy. However, the bottomline is that people with a college degree or higher make significantly more money than people with only a high school degree. So, in effect, the student loan borrowers looking for blanket amnesty are expecting less fortunate people to pay their debt. Not going to work, especially considering the outcome of the election.

Lets get real. Student debt is over a trillion dollars, and up 17% since 2013. Student loan debt is rising at a rate 3 times inflation, and it is not getting better. Moreover, on federal loans, the Department of Education has many nasty tools to insure that they are going to collect their money. The loan is hardly ever dischargeable in bankruptcy, and the DOE can garnish your wages, grab part of your social security check and your full tax refund without even going to court. Private lenders got all the benefits of non-dischargeability without having to make concessions to borrowers on repayment plans geared to income (Congress really dropped the ball on this one). Borrowers are not going to get a political bailout, and face a daunting task if they default on either a federal, state or private loans.

Who do you turn to? Your friendly servicer. According to the government, the servicers are there to advise the student about the best way to deal with their students loans. But many just push you into forbearances. In the short run, that may forestall payments. However, the accrued interest is just added to your principal debt. So, you leave forbearance owing more than you entered. In January, the CFPB filed a 66 page complaint against Navient alleging, among other things, that Navient pushed federal loan borrowers with long term employment issues into forbearances instead of income driven plans.

Your student debt is not going to go away miraculously. You are going to have to deal with it. We are here to help.

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Can You Settle on a Federal Loan?

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